臺大管理論叢 NTU Management Review VOL.30 NO.2

259 NTU Management Review Vol. 30 No. 2 Aug. 2020 testing the influence of corporate governance, recognizing the determinants of CSR, investigating the impacts of CSR on accounting quality/information contents, investigating the impacts of CSR on CEO compensation/reputation, investigating the impacts of CSR on tax behavior, investigating the impacts of CSR on performance, and investigating the impacts of CSR on cost of capital and risk (Malik, 2015). Among those studies relating to risk, the measure of risk used most frequently is market risk (or beta) derived from Capital Asset Pricing Model (CAPM). However, as mentioned by Acharya and Pedersen (2005), liquidity risk may affect asset prices, suggesting that the expected return of a stock is affected by market risk, liquidity risk, and commonality in liquidity. In addition, Lang and Maffett (2011), Ng (2011), and Sadka (2011) suggest that higher information quality can lower liquidity risk and, hence, lower the cost of capital. Many studies also suggest that socially responsible firms provide quality financial reports either through increased disclosure or mitigated earnings management (Gelb and Strawser, 2001; Chin, Shen, and Kang, 2008; Kim, Park, and Wier, 2012). Thus, the present study expects that socially responsible firms enjoy lower market and liquidity risk. In terms of the measures of liquidity risk, Pástor and Stambaugh (2003) establish the measure known as the market liquidity factor. In addition, they extend Fama and French’s (1993) three-factor model by including the market liquidity factor and the estimated coefficient of the market liquidity factor as the measure of liquidity risk. Acharya and Pedersen (2005) further consider the illiquidity cost in order to extend the standard CAPM in a manner that separates systematic risk into market risk and liquidity risk. This study explores the effects of CSR on financial risk by using US data. Based on a sample of 1,496 individual firms and 8,519 firm-year observations during the period of 1995 to 2011, it finds that superior CSR performance is associated with lower market risk and lower liquidity risk. As a robustness test, the study also finds that superior CSR performance reduces the cost of capital. Furthermore, the performance of corporate governance activities increases the cost of capital, even though the test controls for industry effects. Although there is a positive association between corporate governance performance and the cost of capital, the corporate governance dimension is distinct from other social and environmental dimensions of CSR (Kim et al., 2012; Kim, Li, and Li, 2014). Therefore, if the study excludes the corporate governance dimension from CSR activities, CSR performance is negatively related to the cost of capital. In order to distinguish between good and bad performers on each CSR dimension, Bouslah, Kryzanowski, and M’Zali (2013) consider strengths and concerns separately and find that